The Irish SME sector and post-pandemic economic recovery

Over the last 12 months, businesses have demonstrated a great ability to adapt and overcome the challenges presented to them. The SME sector now faces an uphill battle to reach new customers and markets, find new income streams to generate cash flow, while becoming more efficient and agile to strengthen their business into the future. Therefore, it is of the utmost importance that financial support and practical policies are in place to allow SMEs invest in digitalisation and compete with EU and global SMEs within the digital economy.

Vodafone's new SME report, Covid-19 and The Irish SME Sector: Supporting Recovery and Growth, carried out in collaboration with economist, Stephen Kinsella, was based on a nationwide survey of 500 SMEs operating in rural and urban areas in Ireland and across a wide range of industries. The report revealed the extent to which SMEs relied on technology for survival over the last 12 months and their willingness to continue to invest in digital transformation in order to adapt, grow and compete internationally. In fact, 43 per cent of respondents claim they could not have functioned productively without investment in technology over the past year.

To mitigate against the challenges presented by Covid-19, Irish SMEs engaged in several strategies, including investing in new communication and digital channels to access new markets and engage with customers, and support remote working.

However, the SME community sees the cost of investment in technology as a significant barrier, compounded by a lack of access to capital to support them in their digital transformation.

According to the report, SMEs face other challenges in relation to technology adoption. While cost is the highest obstacle, trust in suppliers (36 per cent), integration with older systems (32 per cent), and having the right in-house capabilities (28 per cent), are also common issues for SMEs wanting to invest.

Businesses also identified a critical need to upskill employees in the coming years, especially in relation to digital skills. One quarter of SMEs lack confidence in the digital skills of their employees and almost half plan to invest in digital skills training and development. This rises to 65 per cent for larger SMEs.

Supports for SMEs

Sentiment in Ireland appears much more certain in relation to economic policy than in other EU markets. While Ireland exhibits large amounts of volatility caused by Covid-19, both Germany and the wider EU experienced a degree more since February 2020. The latest Economic Policy Uncertainty Index at November 2020, show Ireland at 285, Europe at 327, and Germany at 387, highlighting a remarkable lack of variation in the levels of uncertainty for Ireland, relative to Germany. This suggests Ireland was able to communicate policy certainty more adequately than its EU counterparts, due to strong policy supports by the Government.

According to the survey, more than 80 per cent of SMEs accessed a Government service during the period and interestingly, 27 per cent felt that the Government was providing enough support.

Irish SMEs and digitalisation

The European economic benchmark analysis, completed by Professor Stephen Kinsella for the Vodafone study, revealed a widening gap between Irish and European SMEs in relation to digitalisation. Businesses here scored mid-table for the level of digitalisation of its firms versus other European countries, even before the pandemic hit.

Ireland is one of the lowest in the EU in terms of the adoption of digital tools, behind Denmark, Latvia and Estonia. For example, nearly half (49 per cent) of Latvian firms are described as having a high use of technology, versus only 31 per cent of Irish firms. This is largely due to the nature of the SME market in Ireland, which is primarily made up of micro firms - one to nine employees - who do not have the same access to finance to make significant changes to their digital infrastructure. According to the report, only 19 per cent of smaller Irish firms are ‘highly digitalised’, while just 24 per cent of larger firms are.

Policies to support SME digitalisation

As Ireland looks to post-pandemic economic recovery, it is vitally important that the appropriate policy supports that are in place to enable SMEs to embrace digitalisation – for their survival, growth and to remain competitive.

SME's have varied digital needs, so they need to be able to choose the most appropriate technologies or tools for themselves

The Vodafone report identifies three crucial areas that will support SME digitalisation:

Ensure all businesses, no matter where they are located, have access to high-speed connectivity. This is an obvious need and one that has become even more important over the past 12 months. Simply put, a lack of access prevents SMEs adopting and optimally using digital solutions, even if there is a clear business case. The EU Recovery Fund may be best placed to facilitate this infrastructure investment and ensure widespread access to high-speed connectivity across the country.

Close the connectivity and technology divide between large and small firms. To address this, Ireland may want to consider voucher schemes to support high-speed connectivity and technology adoption, targeted at SMEs in specific sectors that are most impacted financially and least digitalised, or to SMEs more widely. Funds from the EU Recovery Plan could provide the resources required to close this gap at a national level. Additionally, the Irish Government’s €3.4billion Covid-19 Recovery Fund, set out in budget 2020, is also a vehicle which could deliver this support for investment in digital infrastructure.

Lastly, SMEs need flexibility with the supports on offer. SME’s have varied digital needs, so they need to be able to choose the most appropriate technologies or tools for themselves – a one-size-fits-all policy is unlikely to be effective for all. To address this, government may want to consider offering a mix of support measures, including: flexible grants or vouchers earmarked for digital investment, incentives for the financial system to lend to SMEs for digital investment, training in sector-relevant digital skills and/or sector-specific online resources.

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